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UWP rule changes could hit bonuses

Some of the UK&#39s biggest life offices could be dealt a severe blow by new

rules which change the way unit-ised with-profits liabilities are


Unless life offices increase their reserves, they face reducing terminal

bonuses, not being able to smooth bonuses out and writing less new

business, according to industry analyst Ned Cazalet.

Under the new rules from the insurance directorate at the FSA, which came

in on May 29, unitised with-profits liabilities will be increased by 10 per

cent to a more “realistic” level.

The move could see free-asset ratios, one indicator of solvency, slashed.

Some life offices may have to go cap in hand to their parent companies for

a capital injection.

Cazalet says the solvency fears are partly responsible for Norwich Union&#39s

merger with CGU. He says other IFA life offices most likely to feel the

strain include Axa Sun Life, Clerical Medical, Equitable Life, NPI, Friends

Provident, Scottish Life, Scottish Mutual, Scottish Widows and Standard


Cazalet cites these companies because they have the highest proportion of

unitised with-profits business coupled with relatively modest solvency

although all life offices&#39 reserves will be affected.

Scottish Mutual senior actuary Hamish Scott says the regulations have also

prompted several life offices to remove the guarantee that investors can

cash in their investments after five or 10 years without the application of

a market value adjuster.

Prudential product manager Campbell Boyd says: “Prudential has estimated

the impact will require us to increase our reserving requirements by 15 per

cent to cover the liability for the Prudence bond. But we will not be

changing our bonus strategy bec-ause we have the financial strength not



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